Lloyd’s of London underwriters are attempting to convince a U.S. judge that financier R. Allen Stanford conspired to steal money so they can avoid paying attorneys to defend him on criminal fraud charges.
U.S. District Judge Nancy Atlas today began hearing evidence in federal court in Houston in a three-day civil trial conducted without a jury in Stanford’s lawsuit against the London-based insurers.
Stanford, charged with leading a $7 billion fraud scheme, and three former colleagues who are now co-defendants in his criminal case, claim they can’t afford defense lawyers without access to $100 million in liability insurance Lloyd’s sold to Stanford Financial Group. Lloyd’s has denied their claim, citing a guilty plea by Stanford’s former finance chief and reports by forensic accountants who probed Stanford’s books.
“Basically, the underwriters sought to convict their own insureds,” Lee Shidlofsky, a lawyer for Stanford’s colleagues, said in an e-mail this year. “And by doing so, underwriters undermined the very essence of the protections afforded by a directors’ and officers’ policy.”
Stanford and his co-defendants are charged with 21 criminal counts of deceiving investors about the security and oversight of $7 billion of certificates of deposit issued by Antigua-based Stanford International Bank Ltd.
In January, Stanford is scheduled to be tried before a federal court jury in Houston. The other defendants will be tried together at a later time.
During today’s proceedings, Dan Cogdell, a lawyer for co-defendant Laura Pendergest-Holt, said his client has reached a settlement with Lloyd’s. Pendergest-Holt was Stanford’s chief investment officer.
Outside the courtroom, Cogdell declined to disclose the terms of the accord.
In December 2008, Stanford International Bank’s financial statements showed it had $8.1 billion in assets, Lloyd’s lawyer Barry Chasnoff told Atlas today. When the SEC seized the operation a few weeks later, the money was largely missing.
“In spite of herculean efforts, the receiver has recovered less than $1 billion of those assets,” Chasnoff said. “This case is the story of what happened to those billions.”
“The evidence will show there wasn’t a Ponzi scheme, wasn’t any type of fraud committed and there wasn’t even any misrepresentation,” Stanford’s lawyer, Robert S. Bennett, told Atlas in his opening remarks today.
Stanford’s bank paid out more than $2 billion in CD redemptions in the last quarter of 2008, as investors were scrambling for funds during the global financial meltdown, Bennett said.
“Until the government came in and took over this bank, no one lost any money,” he said.
Any wrongdoing, Bennett said, was the fault of former Stanford Chief Financial Officer James M. Davis and Pendergest-Holt.
“My client was completely out of the loop,” he said.
A former Stanford employee, among the first witnesses to testify in the trial, said neither brokers nor customers were told the true nature of the Stanford CD investment portfolio.
Mark Tidwell, a financial adviser who left the firm in December 2007, said he didn’t know that the majority of the bank’s investments weren’t supervised by a team of elite money managers or that the bank carried large illiquid real estate investments and unsecured loans to Stanford on its books.
“We were told that within three to five days, the bank could be converted essentially into cash,” Tidwell said.
Lloyd’s lawyers claim that what transpired fits the underwriters’ description of money laundering, defined in the policies as any attempt or conspiracy to misappropriate someone else’s money, a definition which is broader than that of the corresponding federal criminal statute.
“The facts fit money laundering whether he used that term or not,” Chasnoff said in court last year, referring to Davis’s plea agreement.
Chasnoff said Lloyd’s policies are written so that any allegation of money laundering is enough to deny coverage of defense costs.
While prosecutors haven’t charged Stanford or the other defendants with money laundering, the underwriters say Stanford and the other executives violated their version of it, voiding coverage.
Atlas asked the Lloyd’s lawyer where the unusual definition of money laundering had come from.
Chasnoff replied the clause had been in Stanford’s three previous directors’ and officers’ policies and was originally brought to the contract negotiation at Lloyd’s by Stanford’s insurance broker.
“All I can say is, it’s turning out not to be such a bargain,” Atlas remarked. She asked Lloyd’s to present a witness on the origin of the definition. Chasnoff said the underwriters hadn’t planned to offer one.
All the defendants had told Atlas they’re destitute. Their assets were seized in February 2009 after the U.S. Securities and Exchange Commission sued them for allegedly paying returns to early investors by taking funds from later investors.
When Lloyd’s denied their coverage in November, the former executives sued and won a temporary court order requiring the underwriters to pay for the defense lawyers until a judge can determine validity of the coverage.
Lloyd’s has already paid more than $15 million to attorneys representing the four criminal defendants and several lower-ranking employees also under investigation by prosecutors and securities regulators, according to court papers.
The civil proceeding in Atlas’s courtroom will provide a preview of evidence and testimony that prosecutors may seek to use in the criminal trials.
The biggest difference is Lloyd’s underwriters need only convince Atlas that Stanford is more likely to be guilty than not guilty, a lesser standard of proof than the beyond-a-reasonable-doubt certainty required in a criminal trial jury.
Neither Stanford nor his co-defendants are expected to testify because any statements could be used against them in the criminal case.
Atlas said today that she would defer a ruling on whether she’ll infer that the defendants are guilty if they assert their Fifth Amendment right not to testify, as she is allowed to do under civil law.
Lloyd’s asked Atlas to make that inference.
“This is not the criminal trial,” Atlas told lawyers today. She said the underwriters have established in court filings what Stanford and the other executives knew of the misconduct alleged by Lloyd’s and when they knew it.
Stanford, who has been in jail without bond since he was indicted in June 2009, will attend each day’s court session in shackles. Atlas ruled he could have one hand free to ease handling of documents and communication with his lawyers.
The case is Laura Pendergest-Holt v. Certain Underwriters at Lloyd’s of London, 4:09-cv-03712, U.S. District Court, Southern District of Texas (Houston).
The criminal case is U.S. v. Stanford, 09-cr-00342, U.S. District Court, Southern District of Texas (Houston). The SEC case is Securities and Exchange Commission v. Stanford International Bank, 09-cv-00298, U.S. District Court, Northern District of Texas (Dallas).